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Market Building Equilibrium on Schedule

January 13, 2001

Mainstream old-tech . . . nervousness intermittently gripped the market today, as a brief statement from Cisco's (CSCO) boss (John Chambers) roiled the comebacks in at least two spots, with yet another hesitation from the PG&E feared-default story that came out, though the general characteristics of a much firmer NASDAQ (particularly the smaller and mid-cap stocks benefiting from residual, but hard-fought-for, January Effect comebacks) continued to dominate action, vis-à-vis Dow Industrialbehavior.

Daily action . . . saw the (900.933.GENE) hotline managing to handle the oscillations about as adroitly as possible, given the guideline entry into theMarch S&P around 1298 and a virtually-seamless exit at 1310 and then a short and reentry around 1303. This effort is contemplated to be retained as a fairly interesting down-to-up reversal.

(And yes, at least we were pleased by this year's CES; aware that many technologies are not fully developed or 'quite' available for shipping into the mainstream market for business or consumer purposes. But due to slumping business matters that obviously impacted everybody's stocks for the most part, accessibility to many key executives, and their general comparative willingness to be informative, not effetely detached as they sometimes are; helpful in grasping the tone of company postures; not to mention enthusiasm or lack of, which is a subjective interpretation. This report is abridged with respect to non-subscribers, due to efforts and delays flying to LA amidst heavy rain.)

Structurally . . . it has been gratifying to hear the Street and financial networks both in a mode to either warn about techs so far after the heart of their declines, or grasp what we've recently been saying; as regards the prospect that many are fighting what we call 'the last war', by selling rallies, in lieu of focusing on investors buying the dips.

In a declining-rate environment, has thought that the stock market, particularly as measured by the Dow Industrials, would be impacted by the credit conditions, of course, and the sector shifting, but would generally migrate through the catacombs of this year, looking for light at the end of the tunnel (and no we don't expect oncoming freight trains). We are a little surprised that debt analysts are surprised to see T-Bond corrections, or even intermediate paper under some pressure. Those higher yields to us are pretty obvious revealers of what we've contended for months; that this Fed is so behind the curve, that now their panic to lower rates will ultimately (no time soon) be capable of reviving not only the economy, but (in several years) possibly inflation; which is why longer paper would be moving down, while shorter-maturities continue to reflect the formal commencement of the current (expected) series of fast rate cuts.

Again; the T-Bond market has been forecasting this since our long at 89 a year ago (actually a bit longer); so why would it pay for anyone to respond to the actual later rate cut by buying bonds after a year-long advance has foretold the slowing economy and lower rate condition? Of course it wouldn't, which is why we observed the shorter term overbought condition in the bonds, or some time ago in the Dollar Index, which is likely near completing it's contratrend move, which was also preordained here due to the dangerous upward acceleration, which saw us calling these past two months in fact for this Greenback drop, but against a backdrop of secular U.S. reserve currency strength, and the necessarily stabilization of theEuro, even while Yen-Dollar eased. At the same time Gold was expected to have a contratrend rally of as much as $50, but not lots more, and certainly not a secular turnaround providing U.S. Fed success.

Later, led by companies with better credit-quality, on top of business models that can anticipate better economic futures, and eventually as bank lending loosens-up, so as to defray concerns about the U.S. emulating Tokyo in the early parts of the 1990's, as you know, we could envision the markets advancing, in anticipation of a flattening of the Yield Curve considerably, and ultimately the next upward U.S. business cycle. As a matter of fact, the current correction in the intermediate and long-end maturities are contributing to the flattening of the curve, very much as expected (what we called the 'catch-down' of the long paper while the short paper 'caught up'; towards equilibrium).

Equilibrium, incidentally, while not making great sound bytes (for the media, which so absurdly tries to deduce analysts thoughts typically while cutting-off main arguments), is actually mundanely productive, and hence bullish for contributing to confidence or base-building strategies, which while not always visible early, simply take lots of time.

While it is impossible to 'label' the entire market as bullish or bearish, or even for the powers that restructure the composition of the Senior Averages to successfully do so (though their efforts can often obfuscate the internal declines from being noticed by the mass of technicians, which is why most missed our April of 1998 internal top, and at the same time are possibly missing the rotating lows being constructed through the various vacuums and disappointments of late '00 and the ongoing first half of '01); so is it possible to recognize the difference between accumulation and distribution. If we had, and that's what we contended, distribution into the highs of 1998 and '99 rallies, and a narrowly-based unsustainable parabolic spike in 2000 which would collapse in the Spring, then it is seriously possible (though admittedly tricky in a fragile market) to conclude that the broad decline is cathartically working through a completion -a long but nevertheless viable- form of accumulation. And that, while not so simplistically or superficially glib as a traffic light signal, is nevertheless close to 'market timing'; that is absolutely an 'art', not some sort of exact 'science' or 'system' or would self-defeat.

Infinite Market Wisdom . . . was a topic last night, as historically these things take time; with the psyche of Americans quite different (particularly during the prosperous times) than prevailing or common financial approaches in many areas of the world, not to single-out Japan. It would, for example, be very American to see the Nasdaq 100 (NDX) and NASDAQ itself, led by mid and big-cap stocks that cease going down on bad news as outlined, separate and apart from the desired moderated sort of a 'January Effect', which is ongoing, though like pulling teeth to get to breakout of a root-bound condition. Ultimately, the tooth (or teeth) are yanked, or painful root canal performed, and eventually the pain is lessened; though few realize it while suffering.

Why the analogy? Because the entire process is sometimes moribund, often painful, but historically tends to have a predictable eventual outcome. Since others know this, the market -in its infinite wisdom- has a way of frustrating speculators and investors to the point where they lack conviction, or if they had a modicum of it, surrender. By around then, the market, bolstered by high-cost holders of most stocks rotated out, and a new crowd of low-cost holders rotated in, and diminished competitive rates in the money market arena offering less attraction for edgy investors, you get more new focus on equities, which absent sellers, but with shorts and bears negatively postured still, tend to be in potentially interesting positions to rush forward later-on, sometimes with rapid upside speed bursts to boot. This is the heart of what we wrote in the last day or two; and it's rewarding to hear others also now questioning the wisdom of very bearish outlooks after a huge decline, instead of looking for basing periods or rallies.

In summary . . McClellan Oscillator data is not available before the close, when this report had to be prepared, due to flight schedules. However, we are able to add that a determination had been made to hold our better-than-seamless long from 1298 in the S&P March futures overnight, with no stop per the last hotline which was provided after this report was prepared as we leave Las Vegas. (Better than seamless due to a series of gains, including a couple scalped profitable shorts but continuing long now.) Preliminary call for Thursday is up-sideways-up, ideally without much downside other than maybe a knee-jerk absorption to mediocre reports from another old-model-style (in our opinion), that of Yahoo! (YHOO), which we doubted all year, then new rallies.

According to the Talmud you should keep one-third of your assets each in land, business interests, and gold.
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